Me005 Engineering Economics (Module 1)

MODULE 1
ME005 Engineering Economics

Engr. Christian Roice Tayag
15 August 2022
FIRST DAY HI!
COURSE POLICIES
GRADING SYSTEM
GRADING SYSTEM
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INTENDED LEARNING OUTCOMES AND
TOPICS
Intended Learning Outcomes
At the end of this module:

• Students will be able to define the different terminologies in the engineering economy.
• Students will be able to illustrate the different formulas of simple and compound interest.
• Students will be able to compute inflation and discount of a certain amount.
• Students will be able to solve engineering economics problems.
Topics
• Introduction to Engineering Economics
• Simple and Compound Interest
• Inflation and Discount
• Sample Problems
ECONOMIC ENVIRONMENT
ENGINEERING ECONOMY
It is the analysis and evaluation of the factors that will affect the
economic success of engineering projects to the end that a
recommendation can be made which will ensure the best use of
capital.
Consumer and Producer Goods and Services
Consumer goods and services are those products or services
that are directly used by people to satisfy their wants.
Producer goods and services are used to produce consumer

goods or services or other producers' goods.
Necessities and Luxuries
• Necessities are those products or services that are required to
support human life and activities that will be purchased in
somewhat the same quantity even though the price varies
considerably.
• Luxuries are those products or services that are desired by

humans and will be purchased if money is available after the
required necessities have been obtained.
Demand
It is the quantity of a certain commodity that is bought at a certain
price at a given place and time.
• Elastic demand occurs when a decrease in selling price results

in a greater than proportionate increase in sales.
• Inelastic demand occurs when a decrease in a selling price
produces a less than proportionate increase in sales.
• Unitary elasticity of demand occurs when a mathematical
product of volume and price is constant.
Competition, Monopoly and Oligopoly
Perfect competition occurs in a situation where a community or
service is supplied by a number of vendors and there is nothing
to prevent additional vendors entering the market.
A monopoly is the opposite of perfect competition. A perfect
monopoly exists when a unique product or service is available
from a single vendor and that vendor can prevent the entry of all
others into the market.
An oligopoly exists when there are so few suppliers of a product
or service that action by one will almost inevitably result in similar
action by the others.
Law of Supply and Demand
Supply is the quantity of a certain commodity that is offered for sale at a certain price at a
given place and time.
"Under conditions of perfect competition, the price at which a given product will be supplied
and purchased is the price that will result in the supply and the demand being equal.“
INTERESTS AND MONEY
TIME RELATIONSHIPS
INTEREST
The amount of money paid for the use of borrowed capital or the
income produced by money which has been loaned.
SIMPLE INTEREST
Calculated using principal only. Ignoring any interest that had been
accrued in preceding periods. In practice, simple interest is paid on
short term loans in which the time of the loan is measured in days.
I = Pin I = interest
F=P+I P = Principal or present worth
F = P + Pin i = interest rate
F = P(1 + in) n = number of interest periods
F = accumulated amount or
future worth
SIMPLE INTEREST
Ordinary simple interest is computed on the basis of 12 months of 30
days each or 360 days a year
Exact simple interest is based on the exact number of days in a year,

365 days for an ordinary year and 366 days for a leap year
SIMPLE INTEREST
Example: Determine the ordinary simple interest of P700 for 8 months
and 15 days if the rate of interest is 15%.
SIMPLE INTEREST
Example: Determine the exact simple interest of P500 for the period of
January 10 to October 28, 1996 at 16% interest rate.
SIMPLE INTEREST
Example: What will be the future worth of money after 14 months if a
sum of P10,000 is invested today at a simple interest rate of 12%
annually.
CASH FLOW DIAGRAMS
• A cash flow diagram is simply a graphical representation of cash flows
drawn on a time scale. Cash flow diagrams for economic analysis
problems is analogous to that of free-body diagram for mechanics
problems.
receipt (positive cash flow or cash inflow)
disbursement (negative cash flow or cash outflow)

Example
Find the future worth of a loan of P100 pesos in 5 years at a simple
interest of 10% per year.
COMPOUND INTEREST
In calculations of compound interest, the interest for an interest period
is calculated on principal plus the total amount of interest accumulated
in previous periods. It means interest on top of interest.
P
0 1 2 3 n-1 n
F
P
0 1 2 3 n-1 n
Interest Period Principal at Beginning of Period Interest Earned During Period Amount at End of Period
1 P Pxi P(1 + i)
2 P(1 + i) P(1 + i) x i P(1 + i)2
3 P(1 + i)2 P(1 + i)2 x i P(1 + i)3
… … … …
n P(1 + i)n-1 P(1 + i)n-1 x i P(1 + i)n
COMPOUND INTEREST
Therefore, for compound interest:
F = P(1 + i)n
Using functional symbols,
F = P(F/P, i%, n)
If you want to find P,
P = F (1 + i)n or P = F(P/F, i%, n)

RATES OF INTEREST
Nominal Rate of Interest specifies the rate of interest and a number of
interest in a year
i = r/m; i = interest rate per interest period

r = nominal interest rate
m = number of compounding periods
per year
EXAMPLE
if the nominal rate is 10% compounded quarterly,
RATES OF INTEREST
Effective rate of interest, E, is the actual interest rate of interest on the principal during
one year.
Illustration
If P1 is invested at a nominal rate of 15% compounded quarterly, after a year it will become
P1(1 + 0.15/4)mn = P1.0375(4x1) = 1.1586, an increase of 15.86% from principal.
Therefore,
E = (1+i) m - 1

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MODULE 1

ME005 Engineering Economics

At the end of this module:

Producer goods and services are used to produce consumer

• Luxuries are those products or services that are desired by

• Elastic demand occurs when a decrease in selling price results

Exact simple interest is based on the exact number of days in a year,

receipt (positive cash flow or cash inflow)

disbursement (negative cash flow or cash outflow)

If you want to find P,

P = F (1 + i)n or P = F(P/F, i%, n)

i = r/m; i = interest rate per interest period

P1(1 + 0.15/4)mn = P1.0375(4x1) = 1.1586, an increase of 15.86% from principal.

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